| Entity |
Advantages |
Disadvantages |
| Sole
Proprietor Schedule C and Schedule F |
*
Easiest business to organize
* Owners free to make decisions
* Minimum legal restrictions
* Business is easy to discontinue
* If owner materially participates, losses can offset
other income |
*
Unlimited liability for the owner
* Limited ability to raise capital
* Skills limited to owners ability
* Income tax cannot be deferred by retaining profits |
Partnership
Form 1065 |
*
Easy to organize
* Better financial strength than sole proprietor
* Combines skills and judgments of more than one
person
* Has a legal status
* Each partner has a personal interest in the business
* If partner materially participates, losses can
offset other income |
*
Unlimited liability for the partners
* Authority for decisions is divided
* Income tax cannot be deferred by retaining profits |
Corporation
Form 1120 |
*
Life of business is perpetual
* Stockholders have limited liability
* Transfer of ownership is easy through sale of stock
* Easy to raise capital
* Shared management
* Adaptable to small and large businesses
* Tax-free fringe benefits for owner/employees |
*
Double taxation. Profits are taxed at the
corporate level and dividends distributed to the
shareholders are taxed at the individual level
* Difficult and expensive to organize
* Corporate charter restricts types of business
activities
* Subject to many federal and state controls.
* Courts may disregard the so call "corporation
liability shield" in the case of single
shareholder corporations
* $800 Minimum tax to Franchise Tax Board |
S
Corporation
Form 1120S |
*
Double taxation of earnings is avoided
* Same limited liability as C corporation
* Passthrough of profits is not subject to SE tax as
in a partnership |
*
Fringe benefits restricted
* Shareholders pay tax on undistributed profits
* Less flexibility for choosing a tax year
* Number of shareholders is limited
* Courts may disregard the so call "corporation
liability shield" in the case of single
shareholder corporations
* $800 Minimum tax to Franchise Tax Board |
Limited
Liability Company (LLC)
Form 1065 |
*
Same limited liability as corporations
* S Corp restrictions on number of owners does not
apply
* Can be owned by corporations |
*
Must have at least two owners for federal tax purposes
(S corporations can have one owner)
* Earnings may be subject to SE tax
* Income tax cannot be deferred by retaining profits
* Life of LLC may be limited
* $800 Minimum tax to Franchise Tax Board |
